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Investment strategies: Three benefits of leveraging Multi-Bank Securities

By Jeff Duesler, Senior Investment Services Representative

June 13, 2016 -- With a host of investment options available in the market, it can be tough to decide which investment strategy to use. Do you just stay the course with your tried-and-true investment strategy? Or do you go against the flow and try something different? If you stay the course with your current strategy, what happens if you can’t find the kind of investment option you want in the timeframe you want it? Is that when you try something new?

If you’ve had any of these questions, there’s good news. Today’s article features an investment strategy I’d like you to know about if you don’t already. One of the major benefits of this strategy is that you might get yourself a better deal than what is currently in the market. This is possible when you leverage the capabilities of Multi-Bank Securities (MBS) through Corporate One.

Increasing growth and diversity benefits your credit union

Corporate One partners with MBS to offer marketable securities, and in the past six years, the firm has grown tremendously, including expanding its capabilities to serve its client base. These expanded capabilities are highlighted by the firm’s ability to underwrite new issues from the U.S. government agencies. (A broker-dealer like MBS has to meet certain criteria to underwrite securities directly with the government agencies; therefore, not all broker-dealers are created equal. The ability to participate as an underwriter of both callable and non-callable debt from these agencies has allowed the firm to move forward and diversify the account base covered.)

MBS’s increased growth and diversity is beneficial to your credit union for two main reasons:

  • First, not only do you have the ability to participate in these new deals that the firm underwrites, but you also have access to customized deals to meet your credit union’s cash flow needs.
  • Second, your access to liquidity when selling securities also benefits because of the diversity of the account base.

Three specific benefits of participating in new deals through MBS

There are several more specific benefits to participating in new deals with MBS. Here’s a brief summary of the three most significant:

  • The ability to purchase benchmark bullet deals at the new-issue price. Only clients of the broker-dealers involved in the syndicate group are offered these deals.
  • The flexibility to structure an issue (through reverse inquiry) that meets the cash flow needs of your institution, taking on the call risk that is right for you.
  • The opportunity to support a veteran-owned broker-dealer.

Benefit 1: Purchasing benchmark bullet deals at the new-issue price

If you are credit union that has been in the market for bullets, you are probably aware that supply has been relatively thin. Sometimes finding a bullet that matures in a specific month is impossible. This scarcity has caused prices to rise and yields to fall for bonds available in certain maturity date ranges. and these fluctuations have happened for a few different reasons. One primary reason is the agencies decided to pass when given the opportunity to issue a bullet. When the agencies do decide to issue, these deals have been well received by the market and have been in high demand.

It is unlikely that you are seeing these new bullet deals from other broker-dealers you work with as the syndicate groups for these deals tend to be composed of five or six (at most) broker-dealers. The larger dealers involved tend to offer new issues to certain account types. When these opportunities are available, rest assured that you will be notified by your Corporate One investment representative.

Benefit 2: The flexibility to structure an issue (through reverse inquiry) that meets the cash flow needs of your institution, taking on the call risk that is right for you.

Opportunities to participate in new bullet benchmark deals aren’t the only advantages of MBS’ underwriting platform. In fact, while benchmark deals are offered about once per month, other types of structures are usually underwritten on a daily basis. These include floating-rate debt, fixed-rate callable debt, step-ups, and bullet issues. These new issues are investor- and broker-dealer driven through a process called reverse inquiry.

Reverse inquiry allows the investor to customize a specific term or structure. Here is an example of how a fixed, callable, reverse inquiry deal might work:

  • First, an investor will go to an approved broker-dealer with an idea for a specific structure.
  • The broker dealer goes to the issuer with the idea, and the agency has an opportunity to show a rate or pass on the structure.
  • For a fixed-rate callable issue, the investor would provide the following:
    • Amount or quantity they are interested in investing
    • Final maturity date
    • Preferred settlement date
    • Amount of lockout or the period of time that the bond isn’t eligible to be called
    • Type of call (i.e. one-time, quarterly, semi-annual, annual, or continuous)
    • Issuer preference (i.e. FHLMC, FHLB, or FNMA).
  • This info is passed on to the issuer and the issuer comes back with a coupon that they would pay.

Each of the above characteristics will affect what rate the issuer would be willing to pay. For example, the more call risk an investor is willing to take on, the higher the rate they should expect to be paid. (Keep in mind the same type of process would be used for a step-up deal.)

In addition, for many investors, having access to a bond at the original issue price is important. There is nothing more transparent than buying the bond at its issue price; whether that price is par, a slight premium, or a slight discount at the time of execution, you know you paid the market price.

Benefit 3: Participating in new deals through a veteran-owned institution

MBS is a veteran-owned institution, and veteran-owned businesses fall into the category of “diversity dealers” when it comes to agency underwriting. The government agencies allocate a certain percentage of bonds, underwritten annually, for their group of diversity broker-dealers to sell. For callable securities, underwriting is a bit less regimented, and deals tend to come from planned refinancing or, more likely, reverse inquiry.

While being a diversity broker-dealer helps participation in these deals, MBS also has to perform adequately to continue being added to new deals. After successfully completing a new issue, the agency expects to see a roster of who purchases their debt because they want to make sure that there is a diverse group of purchasers.

In other words, the agency does not want to see these new issues sold to the same group of money managers or sovereign nations. MBS has done well to distribute to various municipalities, community banks, and credit unions that were not participants before.

Getting started

All of these advantages and more make it worthwhile to consider our partnership with MBS as another investment strategy whenever purchasing bonds. You might get yourself a better deal than what is currently in the market. Have a conversation with your senior investment representative today to see which investments are right for your credit union. You are also welcome to call me with questions and comments.